What’s the relationship between price and value? Pricing a product or service is often a fraught endeavor, especially for entrepreneurs and innovators in burgeoning industries in which price history or competing products may not provide a solid reference point. Determining the price of a new product requires determining its perceived value to consumers. However, this is rarely a clear-cut decision due to the many factors that influence consumer decision-making.
Pricing strategy, a discipline shared by entrepreneurs, marketers, psychologists, and economists alike, offers several guideposts that help determine value for a new (or improved) product. Going beyond the determination of value, pricing strategy also considers the psychological impact of price on consumer’s perception of that value.
Let’s take a closer look at how price creates a perception of value for consumers (or not).
What is Perceived Value?
The consumer experience is far more complex than we often consider from the other side of the shelves. In most cases, consumers don’t know the actual value (the exact cost) of the product that they are buying. Whether a product is “worth” its price is a determination informed by emotion, utility, and a number of other factors that can be difficult to quantify. As Bain & Company summarizes, “perception beats reality in pricing.”
As opposed to actual value – “a reflection of the true costs of production coupled with the costs associated with the product’s sale” – perceived value is “the worth a product or service has in the mind of the customer.” This perceived value, not the actual value, is most often the determining factor in whether or not a purchase is made. If the price of the product compares favorably with the value the consumer perceives in it, you’ve made a sale.
Bain & Company has created an insightful diagram of the “Elements of Value” that ranks consumer desires in a format similar to Maslow’s Hierarchy of Needs. The base of the pyramid is formed by “functional” elements of value, such as “reduces effort” and “saves time.” Above that are the emotional components, such as “reduces anxiety” and “nostalgia.” At the top of the pyramid are “life-changing” and “social impact” elements, which include high-value factors such as “affiliation and belonging” and finally “self-transcendence.” The more of these elements a product can boast, the higher its perceived value is likely to be.
Price Impacts Perceived Value
Price itself is a powerful signifier of value. For example, Apple charges prices that leave a large segment of the market unable to afford their products. Instead of dooming the brand to low sales, the opposite has proven true. Apple product’s high price points (and the accompanying perception of exclusivity) make them more desirable to consumers. As many other brands and marketers can attest, “premium pricing” can create a perceived value that is vastly disproportionate to the actual value of a product.
Interestingly, this psychological effect works both ways – both premium (higher) and “value” (lower) pricing can enhance perceived value in the minds of consumers. This is the case with discount retailers such as Trader Joe’s, which stocks its shelves with custom-branded generic products in order to keep prices low. Rather than creating a consumer perception of decreased value, however, the lower price point allows consumers to perceive that they’re getting a great deal.
This is one area in which branding and reputation are immensely helpful to marketers. The perceived value of a product produced by a brand the consumer views favorably will be higher than one produced by an unfamiliar or unfavored brand. That brand’s reputation for quality, reliability, and customer service are all factored into the emotional perception of the product’s value, as is the case for Trader Joe’s. This is also why brands like Apple are able to command higher prices than their competitors.
Consider Your Brand Promise
In order for a product’s price to match up to its perceived value, it must be consistent with the brand’s “promise.” As we’ve explored previously, a brand’s promise is the consumer expectation a company cultivates through its marketing and branding efforts. As explored by the Harvard Business Review, “one retailer’s reputation… has given consumers the perception that it charges a price premium, when in fact its prices run slightly lower than the average… Its pricing strategy does not mesh with its overall proposition to customers.”
A disconnect between perceived value and price will cause consumers to reconsider either their expectations for a product or its actual value. Either way, this dissonance should be avoided. While a number of complicated factors must be taken into account, a brand’s promise should serve as a guiding star when determining price, as it encapsulates perceived value in a powerful and holistic way.
At Eidson & Partners, we relish the challenge of valuing an innovative new product. A marketer’s job is to create and reinforce a narrative that strengthens a product’s perceived value. And when it comes to determining price, perception is everything.